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HOTTER ON METALS: Glencore to grow agriculture vehicle like Xstrata

Glencore plans to grow its agricultural commodities business in the same way it grew Xstrata in mining. The Big Four – Archer Daniels Midland (ADM), Bunge, Cargill and Louis Dreyfus – would be wise to pay attention.

Under the stewardship of Mick Davis, Xstrata grew from a
collection of niche assets with a collective market
capitalisation of $500 million to a leading mining firm worth
$50 billion in the space of ten years.

Its initial public offering in 2012 was seven times
oversubscribed and up until its $90 billion merger with
Glencore in 2013, Xstrata had driven around 40 merger and
acquisition deals.

Ivan Glasenberg, ceo of the Switzerland-based commodities
trader and producer, says that its plan in agriculture is
similar to the early days of Xstrata, in which it initially
owned a 40% stake. At the time of its merger with the mining
firm, Glencore had pared that stake down to roughly 34%.

Glencore runs its agricultural commodities business through a
relatively new partnership with two Canadian pension funds -
Canada Pension Plan Investment Board with a 40% stake and
British Columbia Investment Management Corp with a 9.9%
interest. Known as Glencore Agriculture Ltd, the business was
established at the end of 2016.

"The idea was to grow Glencore Agriculture and have this
partner in the same way we set up Xstrata in the early years,
[which was] to set up a vehicle where we would not be doing all
the funding, to grow in the mining sector at the time where we
had the public owning 60% and Glencore owning 40%, where we
could leverage that vehicle, and if equity was required we
didn’t have to put it all up ourselves,"
Glasenberg says.

"We’re just doing the same in the agriculture
sector, where this vehicle is set up –
it’s performing nicely," he adds.

Replicating this kind of ambitious growth in agricultural
commodities is not out of the question, but the acquisition
targets are a little more limited.

Based on current share prices, listed firms ADM and Bunge have
market capitalisations of around $24 billion and $11 billion,
respectively. Cargill and Louis Dreyfus are not listed,
however, and valuations of their physical businesses are tricky
for investors to get their heads around, as Glencore itself
discovered when it had its own initial public offering in 2011.

Glencore has already made an informal approach to Bunge, but
was rebuffed back in May. Glasenberg says he is not able to
talk about Bunge – a situation in itself that suggests
there is more going on behind the scenes than is publicly known
– so cannot tell shareholders why he feels the
USA-headquartered company would be a good fit, or whether
Glencore would stay friendly or go hostile in a future deal.

For its part, Bunge is obviously taking Glencore seriously, and
has hired a team of lawyers and bankers to shore up its
defences and consider its future strategic options.

Opportunistic
Glasenberg has spelled out the key components of any future
deal, which he says would be opportunistic: "It depends on
entry point, price, the required rate of return (RRR), and
where we predict the forward price," he notes.

Reading between the lines, however, what is attracting Glencore
to Bunge is the agriculture firm’s position in the
USA.

"We have a very strong agriculture business in certain
countries all over the world, but we’re not well
set in the USA. As you know in the USA we don’t
have much infrastructure and to be able to be active in the
agriculture business, it is an infrastructure game –
you have to own infrastructure so you can source from the
farmer and then get it through the system to get it on board
vessels," Glasenberg says.

"We do need infrastructure and in the USA, we’ve
said we have various different opportunities; it’s
not fully consolidated in various areas, there are small
operators, smaller companies operating in that area, and
it’s not fully consolidated in particular
countries. If we can see an opportunity to consolidate there
and get involved … we continue looking in those areas,"
he adds.

There are smaller potential targets like Asia-based firms Olam,
Wilmar International and Sinar Mas, although their presence in
the USA is less evident when compared to Bunge.

Glencore made a push into grains when it acquired Canadian
grain handling firm Viterra in 2012, a friendly deal worth
C$6.1 billion ($4.8 billion) that gave it a stronger footing in
Canada and Australia.

But efforts since then, including talks with Louis Dreyfus,
have so far failed to produce the next big step. The next
significant move was to establish Glencore Agriculture;
Glasenberg says he’d be willing to dilute the
firm’s 50% stake in the venture "for the right
reasons," just like Glencore did with its interest in Xstrata.

It has also got some flexibility on its $13.9 billion net debt,
which has what the company describes as a "robust cap" of $16
billion but with leeway to go higher if a deal requires it.

Given Glasenberg's reluctance to talk about its approach plus
Bunge's own defensive reaction, some kind of deal with the
agriculture company may not have yet died a death. Clearly
Glencore’s ambitions in agriculture have only just
begun.

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